15 February 2023 12:01 am Views - 160
The Cabinet greenlight has been granted for the draft Monetary Law Act to be published in the government gazette and thereafter to be tabled it in parliament, which is a key prior action
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Bandula Gunawardana |
required by the International Monetary Fund (IMF) to unlock its US$ 2.9 billion rescue package for Sri Lanka.
After securing Attorney General’s clearance, President Ranil Wickremesinghe in his capacity as the Minister of Finance, Economic Stabilisation and National Policies on Monday sought the approval of the Cabinet to publish the draft Monetary Law Act and to able it in parliament.
Although Cabinet earlier approved the draft bill, the Cabinet of Ministers had been granted additional time to submit their views.
Cabinet Spokesperson, Minister of Transport and Highways and the Minister of Mass Media, Bandula Gunawardana highlighted that the new legislation would grant the Central Bank (CB) with more independence to stand against fiscal dominance over monetary policy.
In particular, he noted that the CB would be able to resist pressure stemming from the government for monetary financing, which is loosely known as money printing, under the new law.
“With the continuous budget deficits, every government had been at fault of excessive borrowing and money printing. There’s a theory that no country in the world can develop through money printing. At the same, the numerous rules were not able to stop printing money with each government pursing their political agendas.
That’s why we failed to implement the Fiscal Management (responsibility) Act (FMRA), No. 3 of 2003 as our politicians lacked fiscal discipline. Therefore, we have come to a situation where we have to grant more powers to the Central Bank to resist money printing to prioritise price stability and financial stability even when the government is forcing the Central Bank to print money,” he elaborated.
The draft law is also expected to legalise flexible inflation targeting adopted by the CB.
Central Bank rejects money printing claims
The Central Bank rebuffed the claims of money printing in recent times to settle government bills or even for the payment of interest payments of previous borrowings and pointed at the mostly successful bill auctions in which it managed to raise the full amount offered from the market itself.
Responding to a question on the subject, Central Bank Governor Dr. Nandalal Weerasinghe said he doesn’t see any signs of increase in reserve money expansion, the term used in economics for money printing.
Meanwhile, he also shrugged off concerns raised by certain sections for providing liquidity to the interbank market via term repos, which are aimed only at addressing short-term liquidity requirements of banks and thereby preventing upward pressure on the rates.
“In terms of the amount of reserve money expansion – which is the proper term for money printing – it in fact has shown a deceleration,” he told the media at the post monetary policy meeting press conference a fortnight ago.
He also said as the direct contributions to bill auctions became needless in the first few weeks of the year due to the auctions getting fully subscribed, reserve money expansion had also been curtailed.
During last two weeks the bill auctions went under-subscribed.
The reserve money increased by Rs.59, 020.14 million in the week ended on February 2, 2023 mainly due to the increase in deposits held by commercial banks with the Central Bank.
Certain sections interpret the increase in Central Bank’s total bill holdings as similar to printed money, but the Central Bank says there remains a difference between the two as increase in all such holdings doesn’t result in actual cash which comes into circulation.